Advantages and drawbacks of the so-called “Austrian model” for severance pay
In an earlier post we gave a brief description of the so-called “Austrian model” (or “Austrian backpack”) for severance pay, based on monthly economic contributions made in favor of employees and accumulated throughout their employment relationship. We also highlighted the differences between that model and the current Spanish system, based on a lump-sum severance payment calculated by reference to the employee’s salary and length of service on termination of the contract.
Before we can analyze the impact of the so-called “Austrian model” in depth, we would obviously need to know the final design of its implementation in Spain replacing the current system, an event that yet to take place because for now it is simply a proposal in the manifestos of a few political parties. Our aim here is to explain briefly the advantages and drawbacks associated with this model conceptually.
From an employer’s standpoint, the “Austrian model” implies that, when it comes to shedding jobs, companies do not have to decide which employees they dismiss on the basis of the cost associated with the termination of their contracts. The severance is already “paid” because it has been built up over the employment relationship. This reduces the lack of security and uncertainty in relation to companies’ future costs.
The “Austrian backpack” also has positive elements for employees. From one angle, it provides them with greater certainty and security over a potential dismissal by being able to monitor the sum gradually being built up to be paid to them and, because it is included in a special fund, they will also be more certain of receiving that sum if their employer enters into an insolvency proceeding. From another angle, the fact that employees may receive their “backpack” not just in dismissal scenarios, but also if they decide to retire, change jobs or embark on a business project as a self-employed worker, may make employment mobility and a change of career direction more accessible. All in all, it is a means of saving. Lastly, a system may be set up with no limits on this “backpack” consisting of the contributions made in favor of the employee and the returns that it may have generated over the years.
On the down side, we must be aware that, in comparison with the Spanish system, the “Austrian model” generates a recurring cost possibly on top of salary, which without a doubt is its main drawback. That cost will have to be assumed either by the employer, by increasing its expenses and making it less competitive, or by the employees, through lowered salaries and purchasing power levels.
Garrigues Labor and Employment Department